With its stock closing on Friday at a new low of $20.79 a share, the story of General Electric (GE) and its poor performance in the past decade is one of the sadder tales on Wall Street. But some bulls still express confidence that the giant conglomerate will rebound with the right chief executive armed with a savvy turnaround strategy.
With its still huge market capitalization of nearly $200 billion, "we see a GE with lots of levers to pull on costs and cash," said Scott Davis, analyst at Melius Research. Most people now think the dividend will be cut by 25 percent, he said, but "we see net free cash bottoming out in 2017, flat in 2018, and then ramp up in 2019-2020, up to about the $25 billion-ish level."
Indeed, several analysts believe GE's new CEO, John Flannery Jr., who has described the company as a "self-help story" and referred to 2018 as a "reset year," has the capability and determination to achieve the seemingly impossible goal of saving GE from total disaster.
At a meeting with analysts on Oct. 20, when he announced disappointing third-quarter earnings and issued lower guidance for 2017, Flannery provided a glimpse of how a new GE would be reshaped: through huge cost-cutting, asset sales, pruning of the corporate portfolio, stronger generation of free cash flow and improved earnings quality.
Deanne Dray, equity analyst at RBC Capital Markets, believes that under Flannery's leadership, GE is about to write the next chapter of its 125-year history, with key priorities likely to include "accelerating cost takeout, rationalizing the portfolio, improving the underwhelming free cash flow metrics, tackling the onerous pension liabilities, and improving the quality of earnings in headline results."
The analyst rates GE as "outperform," with a price target of $25 a share, which is down from his previous $27 estimate. Dray believes GE's stock "will effectively be in limbo" until the next company meeting with analysts on Nov. 13, when Flannery is expected to lay out more specifics on his long-term strategic roadmap.
A huge crowd of investors who have either bailed out of the stock after the disappointing third-quarter earnings or are still not sure of whether to take advantage of the stock's drop are eager to hear what Flannery will say at that meeting. "Legions of underweight [in GE stock] investors will convert into incremental buyers," on any good news from Flannery, said Dray in a recent report to clients.
"Mr. Flannery's turnaround strategy for the company should be a game changer in how investors perceive GE," said Dray. Already, sizing up the $20 billion of assets that could be up for sale over the next one to two years is one of the potential catalysts for the stock, he added. "Flannery is looking to reduce complexity in the GE portfolio and streamline its focus as part of his turnaround strategy," said Dray.
So far, the new CEO's strategic review has already identified several small businesses that he has deemed noncore portfolio pruning targets that have a combined valuation of $20 billion (or 10 percent of GE's market cap). Flannery told analysts that was merely the starting point and additional businesses could be divested over the medium term. Among the potential divestments include the lighting, transportation and health care businesses, as well as parts of GE's Power & Water segment.
Because of the reduced earnings guidance, Dray has cut his revenue and earnings expectations for GE. For 2017, he projects revenues of $125 billion, down from $126.4 billion, and earnings of $1.08 a share, down from his previous estimate of $1.50 a share.
Jim Corridore, equity analyst at CFRA Research, who rates GE as a "hold," said he sees GE as well-positioned for long-term growth, supplying high-technology products and services critical for economic development across the globe. However, "given ongoing weakness in oil and gas and long-term restructuring activities, which has added complexity to the company's results, we have become less positive on the shares."
He said the dividend yield of about 4.1 percent is a positive, but "we see the potential for a dividend cut as increasingly likely due to cash flow shortfalls in recent periods."
Scott Davis of Melius Resesarch, on the other hand, sees "no structural reason why GE can't earn $1.50-ish a share next year." Davis added: If Flannery "can't get there, he should break up GE as soon as possible."